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Housing Starts Fade After Busy February

There Is Still No Consensus That the Market Is Slowing

By Daniela Deane

Washington Post Staff Writer
Wednesday, April 20, 2005; Page E01

U.S. builders broke ground on tens of thousands fewer homes than expected in March, the biggest one-month drop in residential construction activity in 14 years, according to government figures released yesterday.

The 17.6 percent plunge in March housing starts came one month after starts climbed to a 21-year high in February, the Commerce Department reported. In March, housing starts fell to 1.837 million homes at a seasonally adjusted annual rate, down from 2.229 million in February, the biggest drop since January 1991. Economists had predicted March housing starts would fall, but not to this extent.

Concrete is poured at a Denver housing development yesterday. The Commerce Department reported a sharp drop in housing starts in March.
(Rick Wilking -- Reuters)

But even with the monthly seesawing in construction activity, economists and builders say the hot housing market is not yet hitting the slowdown many of them have been predicting.

"This is a head fake," said Mark Zandi, chief economist at consulting firm Economy.com Inc. "The market isn't slowing at all."

Zandi said, however, that he thinks the housing market will suffer if mortgage rates rise. "Then we'll see activity come off significantly," he said. "Home sales will drop and then home prices will come off or decline in some juiced-up areas. Home building will be the last to respond."

Interest rates on 30-year fixed-rate mortgages are now at about 6 percent; most forecasts predict they will rise to around 7 percent by year-end. Zandi predicts that even that small increase is enough to slow the housing market.

David Seiders, chief economist for the National Association of Home Builders in Washington, said the drop in March housing starts came after three months of stepped-up building activity because of hurricane damage in the South. He said month-to-month housing figures often show volatility.

"Seasonal adjustment difficulties and bad weather here and there can cause big movements up and down," Seiders said. He said a "better measure of what the market is doing" is the number of building permits issued, another figure released by the government yesterday.

Building permits, an indicator of future construction, fell 4 percent in March, to 2.023 million units at an annual rate. The report also showed that builders still have a healthy backlog of orders, Seiders said.

In some parts of the country, however, builder inventories have risen significantly. But that's not the case in the Washington region.

Ara K. Hovnanian, president and chief executive of New Jersey-based builder Hovnanian Enterprises Inc., said the new-home market in the Washington area is "really strong and really solid." His company has no buildup of inventory here, he said.

"If anything, in a place like Washington, it's becoming more and more difficult to get supply onto the market," Hovnanian said. "We're building fewer houses there than in the strong days of the 1980s. We just cannot get the permits to do it, and the land supply is very tight." He said those local conditions will keep the "market in balance and keep any hypothetical bubble from occurring or bursting."

At the same time, though, Hovnanian said that overall, in his company's markets, some of the "frothiness of the last 24 months has gone away." He said price hikes have moderated over the past four to six months and that buyers have been balking at aggressive increases. Hovnanian builds mainly in the Northeast, but also in California, the Washington area, the Carolinas, Texas and Florida.

"We have to be more cautious about raising prices now," he said.

Economist Seiders predicts that housing starts will rebound in April.

"I keep looking for an obvious flattening of the market and the beginnings of our projected down-slide," Seiders said. "But I just don't think this is it. This isn't a signal the market is starting to unravel."